Micron outlook, capex hike spark rally in memory chip makers

Micron Technology Inc. shares soared to a more than 15-year high Wednesday, leading S&P 500 index gainers, after the memory chip maker boosted its outlook following an earnings beat and raised its forecast capital spending, prompting analysts to hike their price targets on the stock.

Micron MU, -0.80%
shares closed up 8.5% at $37.09 on heavy volume Wednesday, the stock’s highest close since March 2002, according to FactSet data. Shares are up 69% for the year.

By the close, more than 83 million shares changed hands, compared with a 52-week average daily trading volume of 27.3 million shares. In comparison, the S&P 500
SPX, -0.55%
closed up 0.4% for the session and is up 12% for the year.

With memory prices having surged over the past year and Micron topping Wall Street estimates for the quarter late Tuesday, the Boise, Idaho-based company forecast fiscal first-quarter earnings per share of $2.09 to $2.23 on revenue of $6.1 billion to $6.5 billion. Before the outlook, analysts surveyed by FactSet had forecast earnings of $1.82 a share on revenue of $6 billion. After Micron’s outlook, the Wall Street consensus rose to $2.11 a share on revenue of $6.28 billion.

Micron also hiked its expected capital spending to $7.5 billion in 2018, compared with $6 billion in 2017, and that had a ripple effect through the sector, sending chip-focused shares higher.

“We believe the continued NAND spending will benefit AMAT and LRCX the most. ICHR is likely to be an indirect beneficiary of increasing spend dynamic as AMAT/LRCX account for 90%+ of its sales,” Daryanani said. He continued:

Ruben Roy, an analyst at MKM Partners who has a “buy” rating on Micron, raised his price target on the stock to $52 from $45. The DRAM environment, which accounts for 66% of Micron’s sales, remains strong, while the NAND environment, which accounts for 30% of Micron sales, remains healthy, he said.

MU continues to take advantage of a favorable supply demand environment by executing well on technology transitions and cost reductions. Fiscal 2017 was an impressive year for the company and we believe that MU and memory peers are positioned to benefit from continued positive demand trends and a rational supply environment exiting 2017 and in 2018.

Kevin Cassidy, an analyst at Stifel who has a “buy” rating on the stock and raised his price target to $64 from $62, said he doesn’t see Micron’s increase in capex as a peak in the memory chip cycle even though capex increases have accompanied historical peaks. He wrote in a note to clients:

Considering that transitioning to 3-D NAND and sub-20nm DRAM manufacturing require ~20% more equipment than previous generations, we don’t view the 15% Capex increase as potentially driving oversupply. Importantly, we view 3-D NAND Flash and DRAMs as now addressing multiple end markets with a wider variety of feature sets, i.e. less commoditization.

Vijay Rakesh, an analyst at Mizuho Securities who has a “buy” rating on the stock, raised his price target to $40 from $38, saying gross margins are on the rise at Micron, and that is a positive.

Rakesh wrote:

Strong cost tailwinds in 1x DRAM and 64L NAND drive a rebound in GM. Flat to improving DRAM and NAND pricing could also be a tailwind to GM. DRAM GM in the AugQ was at 59%, up 500 bps q/q while NAND GM was down ~100 bps. We expect further gains with continued tight supply and ramping 3-D and 1xnm technologies. MU guided NovQ GMs to 52%, up ~130 bps q/q. MU’s stock usually tracks GM trends and we believe an increasing GM remains positive for the stock. We continue to see strong underlying GM trends with: 1) DRAM/NAND supply remains constrained; 2) topline/bit growth is accelerating, 3) 16nm DRAM transition; and 4) a second gen 3D-NAND ramp could drive further GM improvement.

Of the 32 analysts that cover Micron, 28 have “overweight” or “buy” ratings on the stock, and four have the equivalent of “hold” ratings, with an average price target of $48.71, according to FactSet.

Foreign names in the memory chip space are also notable higher on the year. Shares of Samsung Electronics Co.005930, -0.93%
have run up 43%, and SK Hynix Inc.000660, -1.04%
shares soared 84%.

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